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Monday, March 09, 2009

Local Banks! Local Banks! Local Banks!

Readers of this blog may be tired of my repeating myself, but I'll repeat this anyway: our body politic is too consumed with the fate of mega-sized global banks. Instead we should be empowering local community sized banks that have a superior track record compared to CitiGroup or Bank of America. Hence, I was gratified when Missouri Democratic Senator, Claire McCaskill, made the following observation on ABC's This Week With George Stephanopoulosyesterday:

"And as a matter of confidence, I think it's important for us to point out that there's two kinds of banks that we're talking about here. The -- the commercial banks, the small, local banks, they're fine, and people need to realize that. Your local bank is loaning money; it is operating as it always had.

It may be suffering in its stock prices because of what's going on in the stock market, but they are doing a great job. In fact, most of the commercial banks, the local banks, have loaned more money in the fourth quarter of last year than they had the fourth quarter the previous year."

Exactly. It’s most curious to me that other Democrats haven’t figured this out. Indeed, Democrats are far more supportive of bailing out these institutional monsters than Republicans!

I realize CitiGroup may be “too big to fail” and one can argue we can’t allow that to happen. CitiGroup and the global economy are inextricably entwined, as is AIG. I understand that. And if these bailouts were part of a comprehensive strategy to buy time as we transitioned towards a more sensible financial system, I would embrace it.

To this point however, neither President Obama nor his beleaguered tax cheating Treasury Secretary, Timothy Geithner, have articulated a plan beyond “stabilizing” these financial monstrosities and regulating them better. That is not a viable strategy. Rather it resembles a Hail Mary attempt to toss money into a hole, hope it finds a floor and promise that regulation will ensure it’s not stolen.

A better strategy might well be to discontinue appropriating billions for failures such as CitiGroup in favor of establishing a protocol that rewards healthy local banks with money instead. Set aside the billions used to bail out the mega-sized global banks and establish a grant funding process that rewards independent community banks. As Senator McCaskill sagaciously pointed out, local banks have been responsible and are proactively lending.

At least that way, both the public as well as the global market place can then have confidence that thousands of banks across the nation are meeting viability threshold standards without any “moral hazards.” Furthermore, the independent community banks are far more likely to deliver any infusion of capital onto the street.

Many would call that concept radical and perhaps it is. But the circumstances we find ourselves in are extreme. Keeping CitiGroup, the world’s worst insurance company, AIG, and Bank of America afloat is not mitigating the pain. If we must experience this pain we should at least implement a strategy that builds a healthier financial system.

President Obama is a thoughtful judicious leader that I proudly worked to help elect. I am gratified by much of what he has done already. I strongly support Obama’s efforts at reforming health-care, developing an environment friendly energy policy and investing more in public education simultaneously, rather than give in to garden variety inside the beltway myopia.

But all Obama's good intentions and plans will never come to fruition unless his administration develops a strategy that facilitates a community friendly banking system. Otherwise, the American economy will be condemned to decades of sputtering like an armless swimmer as the global economy slides off the abyss.

2 comments:

I like this idea. Why haven't we been doing this all along? Couldn't we unfreeze the credit markets much more effectively by working through local banks that will actually lend the money? (Rather than massive banks that are trying to clean up toxic assets all over the balance sheets?) Once lending gets going again, then the big banks can slowly unwind themselves from the knots they have tied themselves in with their grotesque schemes based on fictitious financial capital.

Moreover, I like the idea of working through local banks as a downpayment on constructing the new type of economy that will replace the current one that is collapsing. If we can "eat locally," why not "bank locally" too?

I completely agree. If our banks are "too big to fail", then let's shrink them! As we saw in this crisis, large banks have too much power and are hard to regulate. They also tend to be less responsive to local needs, and apply blanket products everywhere. The power they have acquired makes it anti-competitive for local banks.

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